The Microsoft-netbook controversy explained

By | February 17, 2009, 10:16am PST

Summary: Microsoft isn’t a fan of netbooks. To put it down to one thing, it means they lose revenue in the long run. Netbooks, to those who aren’t in the know, are smaller and more compact laptops. Because they’re smaller, they have less memory, less computing power and smaller screens. However, to their merit, [...]

Microsoft isn’t a fan of netbooks. To put it down to one thing, it means they lose revenue in the long run. Netbooks, to those who aren’t in the know, are smaller and more compact laptops. Because they’re smaller, they have less memory, less computing power and smaller screens.

However, to their merit, they are a brilliant tool to have for students. They’re immensely light, easy to use, very handy for taking down lecture notes and the batteries last much longer. The netbook that my parents bought for when they were travelling around the United States has a battery life of around 6-8 hours.

The problem is Microsoft doesn’t like the notebook very much, because of the aforementioned reason - it loses them profit. I was talking to resident Microsoft blogger Mary-Jo “Nighthawk Zero Bravo” Foley, and she explained this one in simple layman terms for me, and you, the reader.

Windows XP will be available on notebooks until next year, but by then Windows 7 will be around on the market. OEM’s, the companies which provide home and student customers with laptops, computers and netbooks, get charged a fraction of a price for the Windows software they sell on their products.

Vista still costs more than XP, for both consumers and OEM suppliers. But because Vista is so bulky and memory intensive, it can’t be installed on netbooks, so XP is used instead. Because of this, the consumer is unaffected as are the OEM’s, but Microsoft will lose a cut of money every time due to the cost difference.

The knock-on effect, especially in this economic climate, dictates that more and more people will buy netbooks because of their general awesomeness, and Microsoft’s will slide as a result.

Microsoft are going to target Windows 7 Professional Home Premium to netbooks, but this can only be a viable option if Microsoft cuts the cost of the next generation operating system. Hardware prices go down as software prices go up. If you were to buy a brand new netbook at say, $400, you’d find yourself spending nearly that on a retail copy of Windows. So why should OEM’s suffer?

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Topics

Zack Whittaker, a criminologist who studied at the University of Kent, Canterbury, is a journalist, writer and broadcaster.

Disclosure

Zack Whittaker

I worked briefly with Microsoft UK in 2006 but no longer have any connection with the company. Regardless, I remain impartial and unbiased in my views.

I don't hold any stock or shares, investments or industrial secrets in any company, but have signed confidentiality agreements with a number of UK and U.S. organisations, whose names I am not at liberty to disclose.

I was involved with Kent Union, the University of Kent's student union, undertaking voluntary, non-salaried, elected positions between early 2009 and mid-2010.

No other company, body, government department, non-governmental organisation or third sector organisation employs me or pays me a salary in any capacity whatsoever.

As a freelance journalist, whenever expenses are given and taken by a company that is not CBS Interactive, these will be disclosed in each relevant post to ensure transparency.

I currently work with a UK law enforcement unit, but this is an entirely separate position which bears no connection to other work.

(Updated: 23rd October 2011)

Biography

Zack Whittaker

Zack Whittaker, criminologist who studied at the University of Kent, UK, is a journalist, writer and broadcaster.

After studying criminology at university, though still in his early-20's, he has already had a series unconventional work and voluntary positions. He has worked with researchers studying neurological illnesses like Tourette's syndrome (which he suffers from), has given lectures on the nature of disabilities in the public community, and occasionally ends up speaking on television and radio discussing the events of the day.

He first had academic work published at the age of 22, then still an undergraduate, and has been cited by a wide range of publications: from the Huffington Post, Business Insider, AllThingsDigital, The Atlantic Wire and CBS News.

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Going Upstream Too.
TripleII-21189418044173169409978279405827 19th Feb 2009
Why would people assume Ubuntu Remix (a turn key, totally easy) wouldn't be useful (and preferable) on a desktop or full size notebook? For the Geeks, you can switch from easy to power user, so it is good there. Why not try selling a truly usable to newbies and the computer unsavvy OS that turns desktops into powerful appliances.

That's the trojan that Windows can't allow. What happens if HP's new MEI is so cool to users (who don't care about OSes) they start wanting it on desktops and laptops?

I disagree with free though, the OS does not have to be free for Ubuntu or Android (you pay them to do the work or do it yourself kind of thing). The problem as outlined in the article, the 80% gross margins on MS's operating system will be eroded, which leads to less money to prop up money losing products and less money to pay to play, etc.

TripleII
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OEM's won't suffer
blackhawk556 17th Feb 2009
they will just move to another OS like linux. OEM care about THEIR revenues not microsoft's. they rather sell a netbook with linux if that means more profit for them. if microsoft plays it right with windows 7, they can make tons on money even on netbooks. but if they get greedy and try to screw OEMs with high prices for windows 7 it will back fire and market share will continue to bleed.
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Get real ...
mwagner@... 17th Feb 2009
It doesn't cost OEMs any more to put Windows on netbooks than it does to put Linux on them.

Besides, most consumers will still choose the Windows version they know rather than the Linux version they don't know. Even IF they have to pay more!
a netbook. That is why MS had to cut the price of XP to the bone for netbooks. They will have to do the same thing for Windows 7. The difference in cost between Windows and Linux is not very significant to OEMs ONLY because Microsoft was forced to almost give away XP.

How can you not understand something so simple???
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And where is the problem?
mdemuth 17th Feb 2009
MS will give low cost OEM licenses for Netbooks, and outsell Linux even though they cost marginally ( I would bet even not so marginally ) more. Just like now.

I would also guess that for most, a netbook will not be their only computer. They are great for travel or low-power work, but most will need more then that.
What OS do you think they will choose for their more powerful computer?
It sounds like a win-win for MS.
revive XP for netbooks, and almost give it away. This shows that customers are NOT willing to pay even a little more for Windows on the Netbook platform.

In case you did not notice, Microsoft took a big hit on Windows revenue because of this.
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And so did Linux
John Zern 17th Feb 2009
as netbooks were to be the "exclusive" domain of Linux cause XP would never sell on a netbook.

For every Windows netbook sold, that's one less person using Linux.

Sounds like a loss for Linux, too.
Microsoft is being forced into things they really did not want to do.
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Help for the foolish....
storm14k 17th Feb 2009
When less people use Windows thats lost profit for MS. When less people use Linux.....well thats just less people using Linux. There is no real loss.
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You're forgetting...
aep528 17th Feb 2009
that most OEMs are paid to install trial-ware and crap-ware on their
systems, which helps offset the cost of the OS. That was worth $50 a
system for Dell apparently (what they wanted to charge for a crap-ware
free PC) That money goes away entirely with Linux. Even on a netbook,
there are probably trial versions of anti-virus and other crap.
crapware is probably coming to Linux sooner or later.

In any case, MS was forced to drastically reduce the price of the OS for netbooks BECAUSE OF LINUX.
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can't say that for a lot of Linux companies out there that rely on support fees to survive.
is in trouble. And, this also cost Microsoft a fortune in Windows revenue.
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Do the math,
storm14k 17th Feb 2009
If the crapwarw payment only offsets the OS purchase (which it probably doesn't) then they break even (most likely a net gain) by switching to a free OS.
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Then why are sales of netbooks
John Zern 17th Feb 2009
with WIndows outselling the same model with Linux?

And why are the return rates for the Linux models 5 times higher?

How can you not understand something so simple???

People will NOT pay for something they don't want.

Simple enough?
netbook platform. That cost them hundreds of millions.

The high return rates were only for a specific model with a poorly thought out distribution and drivers that did not work.
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The problem here is....
storm14k 17th Feb 2009
...that first the return rate on Linux models is not 5 times higher. Please provide proof of this. The only manufacturer claiming this was MSI and when asked the CEO of Asus said he was seeing no such thing. MSI apparently sold a very poor implementation of Linux.

If the sales were that bad and the return rates that high you would have seen Linux taken off these machines long ago and companies like HP wouldn't be investing in their own custom versions. Instead more and more vendors are selling Linux and customizing it.
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Oh really?
storm14k 17th Feb 2009
It costs the same to put Windows and Linux on a netbook?

I guess that is why MS planned to sell a limited version of Win7 in order to lower the price point for OEM's.

Anyway thats not the point. Linux is free. So if it costs no more to put Windows on the box then that means MS has to be charging far less for the product which means they won't be making the same profits. Crapware money isn't going to cover the cost of Win7 so MS is going to have a reduction in gains.
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Again, complete nonsense.
TripleII-21189418044173169409978279405827 19th Feb 2009
They don't know Windows 7 from a hole in the ground. Consumers rejected Vista and kept XP because they know XP. The leap from XP to 7 will be at least as great as XP to Vista, so your statement will still choose the Windows version they know rather than the Linux version they don't know is completely invalid on it's face.

Now, I can (yuck) take any Linux distro and make it look EXACTLY like XP. I add "Control Panel" to the desktop, use a "Redmond" theme in KDE, remove the virtual desktops, configure Mime types so everything is totally automatic it would look "like an old friend". Learning curve is pretty much zero. That or be confused by 7's totally alien way of working.

TripleII
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Can't sell it if people don't want it
John Zern 17th Feb 2009
You make it sound as though people want a netbook regardless of what's installed, but sales indicate that's not true..

Thats like saying everyone would still buy iPods even if all it could play was Latin Dance Music.
But, Microsoft had to cut the price of XP to almost nothing, and it cost them a small fortune.
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Oh come on, Zack!
mwagner@... 17th Feb 2009
Most netbooks running Windows XP today are perfectly capable of running Windows 7, which most industry watchers expect to see on netbooks before Christmas.

It is really easy to carp about Microsoft street prices for Windows 7 but OEM prices are another matter. Soon enough Windows XP will be gone from netbooks and Microsoft will be selling Windows 7 on everything in sight. And for good reason.

Sure hardware prices will continue to plummet compared to software but that has been going on for two generations now.

Who really cares what percentage of the cost of the netbook is software and what percentage is hardware.

Either way, costs come down for everybody, OEMs, Microsoft, and the consumer. In the mean time, MS is crying all the way to the bank. So?
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Oh come on Wagner!!!
DonnieBoy 17th Feb 2009
Do you NOT understand that MS had to drastically lower the price XP on netbooks???? They will have to do the same for Windows 7, and that will cut into MS profits, once again.

To top it off, there will be lower cost Arm based netbooks with great performance that use a lot less juice, and MS will once again be left scrambling like they were with the first Netbooks that only came with Linux.
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What is it YOU do not understand, DB?
John Zern 17th Feb 2009
So they had to lower prices. Alot of companies did.

Google lost money on it's media ads as prices had dropped to where it wasn't PROFITABLE, so they were FORCED to sell.

On th other hand, MS had to drop the price of Windows, yet it's making them a profit. Sure not as much as they would like, but still a profit none the less.

Wouldn't you agree that a profit is STILL a profit?

How many Linux companies out there had to lower the price of their paid support costs just to get someone to buy support from them? How many of them are bleeding now?

I'm sure they'de be happy with some profit as opposed to none, ya think?
willing to pay for Windows on the Netbook platform unless it is almost free.
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RE: Oh come on, ...
n0neXn0ne Updated - 17th Feb 2009
"Sure hardware prices will continue to plummet compared to software but that has been going on for two generations now."

Just like M$ stock price. wink


" MS is crying all the way to the bank. So?"

M$ shareholders will be 'crying' running from the bank.


^o^


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You mean like the Linux distributors?
MGP2 Updated - 17th Feb 2009
Novell:
8/18/08 - $5.86
2/18/09 - $3.50
net change 41%

Red Hat:
8/18/08 - $22.59
2/18/09 - $15.29
net change 33%

MSFT:
8/18/08 - $27.32
2/18/09 - $19.09
net change 31%

So, IF Microsoft PLUMMETING, what's that say about the other two?
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Now you made n0neXn0ne cry
John Zern 17th Feb 2009
sad
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Maybe it says....
storm14k 17th Feb 2009
...they aren't providing good enough support since they are SUPPORT companies and their core product is free. Now you may have to worry about MS plummeting...because if MS goes so goes Windows. If RH and Novell go.....well they just go.
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LMAO...
storm14k 17th Feb 2009
...ok now I see...this is just trolling because it can't be serious.

Who cares about the ratio of hardware to OS cost? Ummm probably MS since this determines their profit and the OEM's since this determines the price point for their product. Many people are still saying that netbooks are overpriced. I don't see any of these people demanding that the netbook come down in price AND keep Windows as the OS. Its safe to say the prices won't drop to the point people want to see running full blown Windows and peoeple aren't going to accept cripled Windows.
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Is your sky pink in your world?
TripleII-21189418044173169409978279405827 19th Feb 2009
Who really cares what percentage of the cost of the netbook is software and what percentage is hardware.

CONSUMERS. Amazing thing that, the people who BUY them care. Even with MS armtwisting and huge OEM push to basically give XP away for $10, they still only maintained 30% marketshare. That's from Microsoft THEMSELVES, so spin that into something it isn't.
http://en.wikipedia.org/wiki/Netbook
Microsoft estimates 70% of netbooks employ Windows XP.[31]

So, let's take $79 as the OEM price of Windows 7 Home Premium.

Hardware cost, 1G ram, 16 Gig HD, 8.9" screen, $200 (guestimate based on current prices and 6 month timeframe for 7).

Linux version, $200, Windows 7 (alien to XP users), $279.

You continue to amaze, you ignore that MS gives XP away to maintain marketshare then say people will pay anything for Windows.

TripleII
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It's an entirely different market
happyharry_z 17th Feb 2009
I don't think MS is worrying much more about this than they are about cell phone OS sales. Nice to have but they don't drive the company. Now, if they don't buy that nice new copy of Office, that could be a problem.
worrying about this.
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Actually, Donnie....
MGP2 Updated - 17th Feb 2009
I'm more inclined to think it's YOU and the rest of the fanbois that are worrying. Look at your post count in this thread alone (You have 3 posts out of 12 as of this writing). If you really thought there was any chance of XP Netbooks or Win7 netbooks failing, you'd be sitting back waiting for the hammer to fall so you could swoop in saying "Told ya so". Instead, you feel you have to spread the FUD by replying to every post. I hope you don't also lay awake at night over stuff like this.
That caused Microsoft to take a huge hit on Windows revenue. ALL BECAUSE OF LINUX.

Now, insult all you want . . . .
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I rest my case.

And every single one of them says the same thing: "XP reduced. MS giveaway...cuz of Linux"

The same thing every freakin' post. Are all Linux people devoid of any originality, Donnie? Or is it just you?
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Kinda sucks
John Zern 17th Feb 2009
That MS is only making 100 million from netbooks instead of 125 million.

I'm sure the employees are worried there might not be enough money in MS's account to cover their paychecks... happy
forced to lower prices for the netbook platform.
Linux, and all you can do is count posts????
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Microsoft tax...
obvio.capitao@... 17th Feb 2009
When computers costed around $1000, people could afford $100 in software licenses.

Now that netbooks are approaching $250, the Microsoft tax is becoming a burden.

Imagine that manufacturers will do everything to cut $30 off. Why would he spend $60 in Windows and Works?

So, manufacturers are choosing Linux and OpenOffice. Microsoft looses twice!
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I passed on Dell Mini w/ Ubuntu
bmgoodman Updated - 17th Feb 2009
For Presidents' Day, Dell had marked down a Mini 9 to $199, but it came only with Ubuntu. I have barely played with Ubuntu, but the one thing that left a bad taste in my mouth was how difficult it was to get fonts that looked clear and readable. The XP version of the same netbook was $299. So Microsoft's $100 tax meant that neither Microsoft nor Dell got any money out of me. Would I probably have worked my way through my issues had I bought the Mini 9? Sure. But I just didn't feel like dealing with the hassle. Microsoft, though, really isn't forced to do anything. Sometimes keeping potential customers on the sideline is win enough.

[Yes, I know the entire $100 isn't going to MS and Dell has their fingers in the pot also.]
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Crap I missed out....
storm14k 17th Feb 2009
I wish I had seen this.

Anyway its easy to get all the fonts that ship with Windows. They are installable with a couple of clicks in the Add/Remove Software app.
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Free is too cheap for MS to compete with. They can only participate in the netbook market by throwing away revenue. Either they take a profit hit, or they let go of this market.

Netbooks = the Anti-MS and the Anti-Apple

They are too cheap.
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Why stop at netbooks?
NonZealot 17th Feb 2009
Netbooks = the Anti-MS and the Anti-Apple

How about cell phones? Why pay for a cell phone OS when you can get Android for free? And anyone who thinks that they aren't paying for OS X on their iPhone, well, you are kidding yourselves. It isn't free, it is bundled and you can't uninstall it (or Apple will sue you under the DMCA even if they claim they won't in some touchy feely anti-DRM letter).

Smartphones = the Anti-MS and the Anti-Apple

I think it is only a matter of time before Android crushes iPhone and WM.
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And then right back to netbooks....
storm14k 17th Feb 2009
It looks like Android will also be on netbooks. In fact its looking like it may be the catalyst to blur the lines between netbook and smartphone. At some point we will see a form factor right in the middle of the two.
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I saw that, how exciting!
NonZealot 18th Feb 2009
Can't wait to see what the Android netbook looks like!
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Going Upstream Too.
TripleII-21189418044173169409978279405827 19th Feb 2009
Why would people assume Ubuntu Remix (a turn key, totally easy) wouldn't be useful (and preferable) on a desktop or full size notebook? For the Geeks, you can switch from easy to power user, so it is good there. Why not try selling a truly usable to newbies and the computer unsavvy OS that turns desktops into powerful appliances.

That's the trojan that Windows can't allow. What happens if HP's new MEI is so cool to users (who don't care about OSes) they start wanting it on desktops and laptops?

I disagree with free though, the OS does not have to be free for Ubuntu or Android (you pay them to do the work or do it yourself kind of thing). The problem as outlined in the article, the 80% gross margins on MS's operating system will be eroded, which leads to less money to prop up money losing products and less money to pay to play, etc.

TripleII
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RE: The Microsoft-netbook controversy explained
Loverock Davidson 17th Feb 2009
Its more like the Microsoft-netbook connection than controversy. Microsoft is willing to put a version of XP on these netbooks to get people used to the idea of using Microsoft Windows. Then when these same people purchase a new PC they will think Microsoft Windows and use that as their choice of OS. Now here is where things really work to Microsoft's benefit. Users can seamlessly connect their netbooks and PCs together because they are both running one common OS, Microsoft Windows. It will provide them the functionality to transfer files, share media, and network with one another all without hassle. You try doing that with any other OS made for a netbook. You can't! This is why Microsoft is banking big on netbooks, because things will just work.
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And I'm not talking about dropping the price. It is forcing MS to come up with a way to differentiate itself. Linux distros on the netbook are custom made for the form factor, Windows on a netbook is just a shrunken down version of the desktop version, and quite frankly it does not scale well. If Windows 7 is to blow away the competition on the netbook, it needs to look like it BELONGS there. The programs running on the netbook need to look like they are designed with a netbook user's needs in mind.

The smartphone makers seem to have accepted this concept, and the Linux netbook distros are headed in that direction too. MS needs too accept the fact that netbooks are here and prepare accordingly. It needs to come up with a desktop design that has 9 inch screens in mind (rolling fields and a blue sky with billowy clouds would be a waste of real estate) and it needs to come up with unique applications that would be useful to netbook users.

How about a RDC that pushes through a home router to connect with your home desktop Win7 computer without all the port forwarding and DDNS crap? That would be a winner for netbook users.

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